13 ways to defeat your debt in 2013
It’s not a record to be proud of: in recent years, Canada keeps setting new highs for the amount of personal debt its citizens carry. Right now interest rates are low, but a whole lot of people will be in trouble when they start to go up again. Debt has become an ugly word in recent years, and it’s no surprise that getting out — and staying out — of debt will be high on many New Year’s resolutions lists this year.
Easier said than done? Different strategies work for different people, but here are some steps experts recommend for dealing with debt.
Tips for eliminating debt
Know your numbers. Unfortunately, it can be easy to overlook the ugly total when debt is spread over credit cards, loans and lines of credit. Many people don’t know how much interest they’re paying, or how long they’ll be in the red making minimum payments. Know what you’re up against: make a list of debts including the outstanding balance, monthly payment, billing date and interest rate. Rank them according to how urgent it is to eliminate them.
Tackle “bad debts” first. While it’s necessary to make minimum payments on all debts, experts usually recommend targeting one or two debts for some extra attention — especially those with high interest rates like credit cards and unsecured loans. How much extra should you contribute? It depends on how much you can afford. Author David Bach recommends doubling the minimum payment on your top priority as a start.
Once you’ve scratched your #1 debt off the list, pour the extra cash into the next item, and so forth.
Pay more often. Just like with a mortgage, increasing the number of payments can help you save on interest charges — especially on larger balances. Find out if you can arrange two monthly payments instead of one or if you can make extra payments through an automatic transfer.
Create (or tweak) your budget. Creating or revising your annual budget? It’s a good time to look for ways to free up some cash to pay down debts faster — like cutting back on non-essentials such as eating out and finding more frugal entertainment. If you aren’t already in the habit, try tracking your spending and expenses to help you better understand your spending and reveal ways to save even more.
Need some help? Try one of these online budgeting tools to make it easier.
Bring in extra cash. There’s only so much room to cut back the budget, so it’s often necessary to earn some extra cash. There are a variety of ways to do it — like getting a part-time job, turning a hobby into a side business or renting out a spare room. Even selling unwanted stuff can give your payments a boost.
Sounds overwhelming? Try setting a reasonable goal. For instance, make it a point to bring in an extra $500 or $1000 dollars over the next year to put towards debt.
Pay cash. Cash serves as a physical reminder to make us think twice before we spend: if you don’t have it, you can’t spend it. Many experts like Gail Vaz-Oxlade recommend using a visual system like jars or envelops to help manage budgets.
If you’d rather not get out the scissors to cut up your credit cards, put them in your safe deposit box instead.
Consider cashing in investments. Not your retirement savings or emergency fund, but the low earning ones such as GICs or money stashed away in “high interest” saving accounts. Do the math: chances are you’re paying more interest on your debt that you’re earning on those savings.
Consolidate… with caution. There’s some controversy surrounding this step, but consolidating your debts to a lower interest plan can cut the amount of interest you’re paying. However, proceed with caution because there are many scams and fraudulent services out there and many people have lost hundreds of dollars for services that didn’t help. Do some background research on the company before signing on through government debt counseling websites. (Industry Canada has more information here.)
Work with your creditors. And the earlier, the better. While they’re under no legal obligation to do so, many creditors may work with you to make special arrangements like lowering interest rates or devising a better payment plan, notes the Canadian Office of Consumer Affairs. This step may be an option if you don’t have too many creditors and you have a good history of making payments on time.
Attend to your emergency fund. Remember that ongoing debt versus savings debate? Most experts still agree that everyone should have some cash set aside for emergencies. It may seem counter-intuitive, but this strategy stems the reliance on credit in a crisis. Setting aside money for emergencies is a good habit to get into rather than accruing more debt.
How much is enough? A general rule of thumb is 3 to 6 months worth of expenses (depending on your circumstances), but even as little as $1000 is a good start.
Plan ahead for major expenses. We do have some warning for major expenses like a child’s education, wedding, home upgrades or next year’s holiday spending. Instead of making payments — and sacrifices — after the fact, let interest work in your favour by paying yourself first. Set up automatic transfers to a savings account as soon as you can.
Keep records. True, it won’t help pay down your debt faster — but keep track of your efforts just in case there’s a dispute or error. If you need to seek help from a credit counselor or consider more serious steps (like a consumer proposal or declaring bankruptcy), you’ll have the documentation you need at hand.
Do what makes sense for you. These tips are common advice you’ll see on blogs, government websites, banking websites and in the financial media. There are plenty of places to find advice, including recent books like David Bach’s Debt Free For Life and Gail Vaz-Oxlade’s Debt-Free Forever.
However, experts don’t always agree on the best strategies, and everyone’s financial situation is different. The trick is to get a sense for the strategies and see if they’ll work for you.
Sources: Canadian Bankers Association, CBC News, CTV News, Industry Canada Office of Consumer Affairs, Moneyproblems.ca, The Montreal Gazette, Office of the Superintendant of Bankruptcy of Canada, bank websites.